In a sectoral coverage note we wrote several years ago called the “March of the Lemmings” in August of 2011 we aired the proposition that only a couple of handfuls of Rare Earth companies would survive the years to come. Things got way worse than even we predicted and yet the couple of handfuls proved correct. We got some of the survivors wrong but the one we said would survive and has was Northern Minerals Limited (ASX: NTU), that was the only rare earth element (REE) stock in the Model Mining Portfolio through the whole “Valley of Death” period which began in 2011 and to some extent is still with us in the form of low Rare Earth prices.

Xenotime

Back in the veritable blizzard of conflicting TREOs, REEs, LREEs and HREEs of the first Rare Earth boom investors were truly boggled by science. Xenotime (YPO4 – Yttrium Phosphate) was thus a welcome arrival on the scene, and that only one company, Northern Minerals, cottoned on to its attractions helped in blocking out the static from the heaving masses of other REE wannabes.

The beauty of Xenotime is the mix of REE in the mineral. The lanthanide content is typical of “yttrium earth” minerals, and runs about two-thirds yttrium, with the remainder being mostly the heavy and medium lanthanides, where the even-numbered lanthanides (such as Gd, Dy, Er, or Yb) each being present at about the 5% level, and the odd-numbered lanthanides (such as Tb, Ho, Tm, Lu) each being present at about the 1% level. Dysprosium is usually the most abundant of the even numbered heavies, and holmium is the most abundant of the odd numbered heavies.

All in the Phasing

We could go on forever about the dynamics of the REE space and its pricing but in reality the trigger for uplift in Northern Mineral’s price will be in the progress towards production as this will carve the company away from the rest of the players.

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The Stage One involves the construction of a 60,000 tpa pilot plant operation at the project. However this is a pilot plant on a grand scale. The three-year operation would consist of both a beneficiation and hydrometallurgical process to produce 49,000kg dysprosium, in 590,000kg TREO contained in a mixed rare earth carbonate (REC) per annum. Construction of this first phase is estimated to take twelve months once funding is in place.

The mining operation would consist of an open-pit mining campaign over five months from relatively shallow pits at the Wolverine, Gambit West, Gambit Central and Gambit East deposits. A total 172,080t of mineralised material @ 1.19% TREO, containing 2,047,000kg TREO would be mined and stockpiled ready to be fed into the pilot plant. A 1.19% TREO grade is achieved as a result of higher grade ore near surface of the deposits to be mined and will have minimal impact on the ore grade when the operation is developed at full scale.

It is estimated that of the 2,047,000kg TREO to be mined and processed through the pilot plant, 75% will be from within the Probable Ore Reserve and 25% will be from Inferred Mineral Resources, which is material that will be carried with the ore within the mine designs. There is a low level of geological confidence associated with Inferred Mineral Resources and there is no certainty that further exploration work will result in the determination of Indicated Mineral Resources or that the production target will be realised.

The ore that will be mined and processed for the pilot plant represents a small portion of the DFS Ore Reserve, at 3,750,000t ore containing 26,375,000kg TREO, and the balance from the Mineral Resource Estimates.

The pilot plant would consist of all the processing steps detailed in the Definitive Feasibility Study (DFS) shown above, however will be downsized to a capacity to process 60,000tpa of ore at 1.19% TREO through the beneficiation plant, and 3,200tpa of xenotime concentrate at 20% TREO through the hydrometallurgical process. Previous offsite testwork has shown that these two processes are capable of delivering superior recoveries of 90% and 92% respectively.

The processes will be modularised and containerised for the pilot plant where possible to facilitate a compressed site construction period and allow for the pilot plant to be transported to undertake testwork at other projects if required.

The existing road network will be used to transport equipment and materials during the construction phase, and reagents, consumables and product during the operational phase via Wyndham or Darwin port.

The Stage Two involves developing the project to BFS level with the inclusion of the results from the studies aimed at reducing mining costs, boosting production, the production of a premium product and increasing the Ore Reserve.

The Stage Three consists of the construction of the full-scale project based on the successful outcomes of the previous stages, and the DFS completed in March 2015.

Funding

All this would remain a pipedream if it wasn’t for the fact that it has lined up the funding for the first phase and has also achieved an offtake agreement (with that most elusive of unicorns in the REE space, an upfront payment component). Under the Sales Agreement, in early 2018, Lianyugang Zeyu New Materials Sales will make a pre-payment to Northern Minerals of AU$10 million. The prepayment covers approximately 15% of the expected value of production during the Pilot Plant phase, with the remaining 85% to be paid to Northern Minerals over the course of the agreement based on volumes delivered.

As for strategic shareholders, in August 2016, the company announced that it had entered into a $30 million equity funding agreement with Chinese companies Huatai Mining (part of Chinese coal trader Shandong Taizhong Energy) and Taizhong Energy Australia to continue on its development path. Due to the rather random capital exit rules that the Chinese government imposed the funds have been trickling in rather than coming in a substantial payment. However, the full amount has nearly been banked by Northern.

Conclusion

While we keep reiterating the much thinned ranks of rare earth players to the point of tedium, this will be the key consideration when the REE tide definitely turns. There are so few survivors that one can number them virtually on ones fingers. This implies a scarcity value to begin with. However, only a few of the dwindled band are in conditions to move forward their projects swiftly to capitalize on any resurgence of interest. We reiterate again that the race will go to the swift and the unprepared, by definition, can be neither swift nor winners. Northern Minerals has soldiered on through the grim times and now is one of the best positioned to ride the wave of revived REE interest.

Northern Minerals is very advanced with its production plans. Having firstly come up with a DFS in 2015, it has now nuanced this with a three phase plan, with the third phase being the move to full production and the first phase being a “pilot plant” that to all intents and purposes is fully-fledged production. The second phase interposed between them is a study of the results of the first phase to justify the third phase. Thus it has the potential (financing permitting) to jump to the front of the queue and be ranked as most likely project to reach production.

We reiterate the Long attractions of Northern Minerals and Hallgarten’s twelve-month target price of AUD 38 cents…to access the Hallgarten & Company report, click here

Comments

Tracy Weslosky

Dear InvestorIntel Reader – George Bauk of Northern Minerals will be flying in from Australia and Christopher Ecclestone will be coming in from the UK for next week’s upcoming Technology Metals Summit on May 15-16th in Toronto…..

No doubt the NTU team have done a fantastic job keeping the dream alive. Funding the pilot plant project using Australian tax payer money is a stroke of genius.
Yet to see an analyst provide an accurate assessment of the pilot plant project ecenomics based on today’s REO prices, let alone based on the actual price of a 52% mixed concentrate.
The HRE story is yesterday’s news.